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Business Confidence Hangs on Trump Action

The burst of market enthusiasm over Trump’s election victory clearly has had a reflection in the real business community. Spending on new capital equipment, including the technologies embodied in it, has picked up markedly. Since an earlier reluctance to spend in this area had held back the pace of overall economic growth and threatened the economy’s long-term underlying productive capacity, this recent pattern is a welcome development. To sustain the momentum, Trump will have to do more than promise. He will have to take action. Tax reform would be a good place to begin.

The statistics are clear. New orders for what the Commerce Department calls non-defense capital goods, effectively productive equipment, have surged since the election. Having declined all year to November, such spending jumped 3.5 percent in December last year, 5.3 percent in January, and 4.1 percent in February, the most recent month for which complete data exist. These jumps made up for the shortfall earlier in 2016 so that as of this last data point, they are about even with where they were a year ago. That is an encouraging start. Of course, the actual shipments have yet to catch up. These remain down 1.2 percent from where they were at this time last year. This is hardly troubling, however, since it reflects the typical lag from a new order to actual delivery of this mostly complex equipment.

Encouraging as these new orders figures are, it is pretty clear that they are based only on the slender support of hope. Trump, during the campaign and since has promised much that is business friendly. Spending on infrastructure is part of that picture, as is regulatory relief, tax reform, and control of entitlements. As enthusiastic as business clearly is about the prospect, it surely remains wary. It has been disappointed before and has held back for most of the seven years of substandard recovery the economy has experienced. Such patterns do not change overnight. It seems likely, then, that decision makers will fall back to their old reserved pattern unless Trump delivers and soon.

So far, he has begun to lift some of the regulatory burdens imposed by the aggressive Obama administration. But that is only a beginning. It is hardly enough to sustain the recent spending growth and turn years of decline into a net increase in spending and the nation’s productive capacity. The false start with Obamacare replacement had to have caused pause among business decision makers. Not only did the legislation fail, but the proposed replacement offered none of the actuarial soundness and sustainability that business wants to see on health care spending and entitlements generally for that matter.

His best bet to sustain this welcome change is with tax reform. The proposal he offered during the campaign fits well with business preferences. It would rid both the corporate and individual tax codes of their present maze of breaks, credits and preferences; collapse the individual code’s seven brackets at present to three; and use the subsequent flows of monies to lower statutory rates at leach level of the individual code as well as cut the corporate rate from 35 percent at present, the highest in the developed world, to 15 percent. He would also offer corporations a one-time 10 percent rate to repatriate accumulated earnings held overseas. These changes have great appeal to most business. The simplification promises to increase efficiency by allowing firms and individuals to conduct their business according to economic as apposed to tax considerations, while the cut in rates would encourage work and investment in the future. What is more, the repatriation of the estimated $2.4 trillion of accumulated profits held overseas would give the economy a welcome cash infusion.

Business is well aware, that the inevitable give and take of the political process will alter the specific figures in the ultimate legislation. But it as reason nonetheless to expect success on this front. The principles embodied in the Trump proposal have appeared in just about every reform proposal from either side of the political divide in past years. But Trump has to act and do so along these lines to sustain business confidence. If he fails to move or, having moved, if he fails to get real reform, the economy and its long-term prospects will again suffer from a lack of spending on this essential productive equipment.